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Comment by edw519 | Hacker News Reader

After eight years, I have nothing concrete to show for my efforts.

So sad, so true. This is what happens when you play a zero-sum game. Even if you win, someone has to lose.

Here's an idea. For the next 8 years, why don't you do something that helps others by making the pie bigger for everyone instead of just trying to game a bigger piece of a smaller pie for yourself.

When you do for others, you always have something concrete to show for your efforts. It may not be what you expected, but it will definitely be something worthwhile, I promise you.

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Calling trading a zero-sum game shows a fundamental lack of understanding of finance. We may have very negative views on the industry, but it exists because it serves many fundamental (and necessary) functions, including:

* Accuracy in pricing shares (and it is important to know the actual value of a company for many reasons)

* Enable market participation. In many illiquid OTC markets, it is all but impossible for anyone outside large institutional players to participate. More trading = lower transaction costs, more transparency, and ability for the little guy (me) to join the action

* Liquidity. And yes, this is very important. It is a common answer because it is a good one

* The same security can be worth different amounts to different people. By definition this precludes it from being zero sum (this statement is of course subject to what school of financial theory you subscribe to)

* Performance measurement. Stock options have gotten a lot of bad press, but compensating a CEO according to lets say, revenue, is much less unbiased and can lead to worse outcomes (e.g., grows business in unattractive segments or over-invests to boost top line)

* Others

The above are in no way MECE and overlap in many ways. Markets can definitely be better, but calling it a zero-sum game or completely value-less to society is a bit too far.

> * Accuracy in pricing shares (and it is important to know the actual value of a company for many reasons)

Define "accuracy"? Preferably in such a way that helps me reconcile it with events like the flash crash.

One of my biggest problems in understanding the financial markets is how you separate the signal (events reflecting actual change in company value) from the noise (speculation, flash crashes, etc.).

While I realize that there is real information (e.g. earnings reports) that goes into the pricing, it seems like there's also a hell of a lot of worthless noise (i.e. I see the flash crash as a massive noise spike).

It seems to me that separating the two is how people make money long-term.

It's more like, everybody who has a view on the value of a security can put some money where his mouth is. The price will move accordingly, until nobody who has a different opinion has any money left to put behind it.

If smaller differences between current price and opinions can lead to action--because of lower transaction costs--the market is better.

> This is what happens when you play a zero-sum game. Even if you win, someone has to lose.

That's why I quit playing poker[1], even though I was a winning player after a lot of study. Zero sum games are no good. Creating things makes more winners and the capability for an unlimited amount of winning.

[1] Well, that and the culture with all the cigarette smoke, alcohol, late neon lights screwing up your sleep schedule, and general degeneracy. But that stuff didn't bother me before so much before I put it in greater perspective.

So sad, so true. This is what happens when you play a zero-sum game. Even if you win, someone has to lose.

When you play football too, if you win someone has to lose. And yet there are positive externalities, to wit millions of people watching the World Cup.

In trading, the externalities might not be so obvious but they do exist.

Could you explain more please? Bonus points if you do it without using the phrase 'provide liquidity'.

A short answer would be: one of the externalities that traders like the OP provide is lowering transaction costs for other traders such as investors. Compare trading stocks with speculating in real estate: buying a $150k house and selling it later might involve (say) $10k worth of commissions to your real estate agent, while trading fees on a comparable stock transaction are usually much lower.

Please see my other comment below and (especially) the linked article.

http://news.ycombinator.com/item?id=1467171

Another positive externality of trading is lowering the cost of funding for enterprises. Companies go through a lot of trouble to make an IPO; they do so because getting listed increases their sources of funding.

A longer answer would probably require a blog post, so that we could discuss whether I'm "cheating" -- after all don't the points above boil down to providing liquidity? Am I really "cheating" or maybe your condition is unreasonable? Et cetera. If I write such a post I'll post it to HN, though I doubt I could do better than Larry Harris.

Eh, isn't providing liquidity reason enough?

I'm not interested in your bonus points, but in the correct answer. I believe this is it: Large, liquid markets reduce economic friction. They make an economy larger, more diverse, and more adaptable. The low friction allows small changes in supply and demand to quickly propagate long distances, producing responses where otherwise the information would have been lost to the friction. You don't have to look far in space or time to find places where this "zero-sum game" isn't or wasn't available. Just look for poverty and lack of social mobility.

There is an economic progression from the switch from barter to money, to lending of money, to spread of risk by enabling minority ownership of multiple ventures (early corporations), to easier transferal of ownership in smaller pieces (allowing more of society to participate), to large-scale, low-friction, highly-liquid markets used by everyone, directly or indirectly. Each step further reduces economic friction, which lowers the threshold for economic activity to take place, causing more of it to occur, increasing the prosperity of the whole society.

Even if you lose money personally in the "zero-sum game" with unfortunate investments, you're still probably losing only a portion of the money you made working at a company that wouldn't exist if not for large, liquid, low-friction markets.

> This is what happens when you play a zero-sum game. Even if you win, someone has to lose.

How is it always a zero-sum game to win? Fundamentally, trading stocks is not that at all. If I buy one of the first issued shares of "Tasty Ice Cream" for $1 because I want the company to spread their goodness as well as get a return on my money, no one has lost. If I lose my job the next week and need to sell my share which may be valued at $1.10 the person that buys has not lost, especially if he receives a dividend long enough to cover the $1.10.

I think this is the way capital markets were originally supposed to work; matching companies in need of growth capital with investors seeking to earn a risk-adjusted return on their long-term savings.

Unfortunately, the financial markets have morphed over time such that now, traders trade for the sake of trading. Instead of our work being our wealth, trading securities somehow became an end unto itself. What's worse is that there really are two markets today: one for the individual retail investor and a second for institutional investors.

Retail investors are taught to 'invest for the long-term', and 'not try to time the market' meanwhile hedge-funds and high-frequency traders play a different game with different rules. Their profits come primarily at the expense of retail investors and in many cases investment banks 'front-run' their own clients taking advantage of their customers in a way that would be illegal in any other industry.

John Stewart explains it better than I ever could in his face to face indictment of Jim Cramer of CNBC: http://ccinsider.comedycentral.com/2009/03/13/jon-stewart-an...

(Link for the Canadians: http://watch.thecomedynetwork.ca/the-daily-show-with-jon-ste...)

For the most part I totally agree. Rampant speculation combined with a fiat currency and too loose regulation is how we got so much money sloshing around, a deformed market, and this economic crisis (and a near collapse of the financial system). We've gotten too far away from fundamentals. We also see this in startups. For example, I totally agree with Mark Cuban who laments that modern founders often look at valuations, and indeed raise lots of capital, for possible IPOs without even discovering how to profit a single dollar.

>Retail investors are taught to 'invest for the long-term', and 'not try to time the market' meanwhile hedge-funds and high-frequency traders play a different game with different rules.

Exactly....that the financial services industry constantly advises the retail investor to "invest for the long term", when they do the exact opposite (while generally using the funds provided by these exact same retail investors), to me is a pretty strong indicator that the markets are something entirely different than how they are sold to people.

The markets were created to provide funding for companies in need of capital, and a branch of the financial services industry was legitimately required to facilitate this process between companies and individual investors, but now almost everywhere I look people are focused on finding new ways to skim money out of the system, under the guise of "providing liquidity", as if there was some problem with liquidity 10, 20, 30 years ago.

This is only true for long-term investors. Algorithmic traders have no vested interest in whether the underlying business succeeds or fails. They are only there trying to predict where the wind will blow next. They are quickly in and out of any potentially profitable company; quick to buy "puts" in a momentary time of weakness or "calls" in a time of temporary strength.

For algorithmic traders, it is indeed a zero-sum game. For the rest of us "investors", as I like to call it, to distinguish it from trading, there is potential for long-term good.

Not really. For algorithmic traders, the transaction costs will dwarf the dividends, so it's really a negative-sum game. Unless there's a very small volume of algo-traders, and a large volume of long-term traders who just happen to be re-adjusting their positions while the game is being played.

It is a zero-sum game as long as you define it as follows: a trader's score for each transaction is (price paid - closing price). If Alice sells GOOG at $100 to Bob, and GOOG closes at $99 that day, then we say that Alice won $1 and Bob lost $1. That's all.

Maybe 1 year later Bob will sell GOOG to Alice at $200, and the stock will close at $201. Again Alice won $1 and Bob lost $1.

Of course Bob made a lot of money in the process, so the zero-sum game definition might sound arbitrary. However, as far as trading is concerned, the definition as zero-sum game is useful. If Bob were a better trader (more skilled or luckier) perhaps he could have saved $2.

See The Winners and Losers of the Zero-Sum Game by Larry Harris.

http://www-rcf.usc.edu/~lharris/ABSTRACT/Zerosum.htm

This is what happens when you play a zero-sum game. Even if you win, someone has to lose.

I don't see the causality. He has yet to succeed because it's an incredibly difficult problem domain. There are problem domains of similar difficulty that benefit people that he could have chosen and still be in this position.

Almost anything where you create something would be better.

Then again he/she is creating software and algorithms.

Yes, but to what end? When it comes to creating things that have value, I like objective standards and my favorite definition is Buckminster Fuller's: "Real wealth is whatever nurtures and accommodates human life." Anything else is pointless.

Incidentally, a recent study claims that 60% of UK workers feel that their work is of no use to society. Financial Services, Telemarketing, Spammers, High-Frequency Traders and many other 'professions' would fit this description. Here is the link: http://www.reddit.com/r/Economics/comments/cjgx7/60_of_uk_wo...

Some problems just can't be solved with the current toolkit. Sometime you need a different toolkit.

For example, ESR derives a development methodology for open source software using Austrian economics.

He did? What does that mean?

Trading stocks isn't a zero-sum game. The value you deliver is to (more) accurately price the shares. It also isn't zero sum in that the person on the other side of the trade values what you're giving in exchange more than you do, by definition.

Beating the market is a zero-sum game.

This is a very valid way to put this, and it helped me. Thank you.

yeah open source part of your work. it should help a ton of people especially if it's a niche. plus it looks great on the resume

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